DUBAI, Dec 9 (Reuters) - Bahrain has been in turmoil since pro-democracy unrest erupted almost two years ago, inspired by revolts in Egypt and Tunisia. The protests are led mainly by Shi'ite Muslim groups demanding equality with the Sunni Muslim majority and political reforms.

Here are some political risks facing Bahrain:

PROTESTS AND CLASHES

Protests continue despite an Interior Ministry ban on demonstrations imposed in October. Five home-made bombs went off in Manama in November, killing two Asian workers. The government blamed the Lebanese Shi'ite militant group Hezbollah.

The government revoked the nationality of 31 men the same month, saying they had "damaged national security", in a move activists said was part of a crackdown on dissent. U.S. officials said Bahrain was not implementing important reforms ordered by an international inquiry into the uprising.

What to watch:

- Opposition marches in defiance of official bans

- Signs of Sunni and Shi'ite armed groups forming

COURT CASES

Arrests and trials of activists and protest leaders continue in Bahrain. In October, Nabeel Rajab was jailed for three years for leading illegal protests. Prosecutors said the protests had led to violence, suggesting Rajab was responsible. In November rights activist Sayed Yousif al-Muhafda was held for questioning for taking part in illegal gatherings but released after a week.

Thirteen opposition figures remain in jail on sentences of five to 25 years for organising protests. Prosecutors said six of them had contacts with Hezbollah and Iran, accusations the men dismissed as government smears.

What to watch:

- Judicial proceedings against activists, including Rajab

TALKS ABOUT TALKS

Justice Minister Sheikh Khaled bin Ali Al Khalifa said after meetings with various political groups in August that the parties should renounce violence before any formal talks to resolve the conflict. The main opposition Wefaq said it had never condoned attacks on police with petrol bombs or other weapons. But since then there has been no advance on those contacts as the situation on the ground became more tense with the protest ban and clashes around Ashura.

On Dec. 7, Crown Prince Salman bin Hamad bin Issa al-Khalifa said real progress can only come through face-to-face negotiations. Opposition groups welcomed his appeal for dialogue but said "excessive" state violence must end.

What to watch:

- Any more talks between government and opposition

IRAN TIES

Bahrain reinstated its ambassador to Tehran in August, a year after he was withdrawn in protest at Iranian criticism of the imposition of martial law and the arrival of Saudi and United Arab Emirates troops to help contain the uprising.

Regional Shi'ite power Iran did not reciprocate by sending back an envoy to Bahrain, which hosts the U.S. Fifth Fleet. In October, Bahrain summoned Iran's charge d'affaires to protest against what it called interference in its internal affairs after the Iranian consul in Manama met Bahrain's leading Shi'ite cleric, Ayatollah Shaikh Isa Qassim. ID:nL5E8LFPUJ

What to watch:

- Iranian, Gulf Arab, U.S. military moves

- Reports of Iran raising the issue of Bahrain nuclear talks

SLOW ECONOMIC RECOVERY

Bahrain's economic growth picked up in the third quarter of 2012 after shrinking in the April-June period, and its statistics office said the small oil producer could recover further from the impact of the social unrest.

Gross domestic product, adjusted for inflation, grew 0.7 percent quarter-on-quarter in July-September, the government said. That compares to a 1.3 percent drop in the second quarter, which was the first quarterly decline since a 6.6 percent slump in the first three months of 2011.

Analysts say the unrest has set back an economic reform programme that aimed to create a free labour market where Bahrainis have the skills and education to compete for jobs.

What to watch:

- Status of economic reform programme

- Capital flows, tourism, property market, planned LNG plant

(Editing by Sami Aboudi/Mark Heinrich)

((andrew.hammond@thomsonreuters.com, twitter.com/Hammonda1)(+971 50 107 4203)(Reuters Messaging: andrew.hammond.thomsonreuters.com@reuters.net))

Keywords: BAHRAIN FACTBOX